“Most businesses fail because the business model does not work,” that’s was the opening line from John Mullins, co-author of “Getting to Plan B” in last night’s talk to Edinburgh University’s E Club. “Business plans are full of naive and unfounded assumptions“; by spending great effort on a very detailed business plan it’s unlikely to make it any more correct. (It maybe makes it more accurately incorrect?) The good news is that it’s usually your Plan B that works.

PayPal is a great example of this. They started out writing software for Palm Pilot’s to let users transfer money wirelessly (by infra-red) from one PDA to another. In fact the PayPal we all now use came along much later, after a few subsequent plans had been tried and none had yielded any potential.

Getting to Plan B is thankfully what small entrepreneurial companies are good at. While large companies may have the resources to invest and try new ideas they are usually so committed to the very well thought out Plan A that they will not deviate from it. Even when it’s clear to all that it’s not working, they won’t adapt to the business model that might just have a chance of succeeding.

So what are you to do?

Admit that there’s too much you don’t know about your new business, so:

stop working on your plan;

start working on your business.

The question you should address is, can I innovate on the business model in any of these five areas:

What is your revenue model?

e.g. Shanda (online gaming in China) – give away the game for free but make money from charging users for in-game purchases, such as weapons, clothes, etc.

What about the gross margin?

e.g. ebay – the gross margin is huge thanks to minimal costs of sale

Other operating costs?

e.g. Ryanair – their success has come from having the lowest operating costs of any airline

Working capital innovation?

e.g. Costco – a major part of their revenues comes not from the retailing but from annual membership fees paid by customers. This is money upfront and funds new store openings.

Investment model?

e.g. Vonage vs. Skype. Vonage spent $246M on marketing in year one to bring in around 1.5M customers, compared to Skype who spent nothing and achieved 7M customers.

Most examples are limited to one type of innovation at a time, but some companies have succeeded with a multi-dimensional approach. e.g. Zara

I discovered a fantastic talk about sustainability by John Anderson, the CEO of Levi Strauss & Co. to the Haas School of Business at UC Berkeley. In it he describes the efforts they are making to lead the world in cutting down the environmental impact of their products, both before and after manufacture.

But the really interesting content for me was the insights into the unique values of this 155 year old company. An example: after the 1906 Earthquake in San Francisco the company extended credit to its wholesale customers to help them get back in business, and all employees were kept on the payroll whilst production facilities were rebuilt. That’s the sort of thing you do when you understand the value of community, long term relationships and retaining great people.

Levi’s was a market leader for a long time, but it went through a crisis time where its commercial success waned. Extensive research was carried out and they found that whilst customers loved the company and loved the brands, the products were not liked or relevant. John Anderson explains:

“We went back and looked at our product. I firmly believe today that without that consumer goodwill that we’d built up it would have been very difficult to get through that challenging period. We worked hard to turn around so now we’re market leaders again. I believe our values played a key role in buying us that time and getting the consumer to come back and buy our products. I put emphasis on consistent and authentic values, because I strongly believe that customers quickly sniff out companies who do things for the short term pr or marketing [advantage]. They know the difference and reward it with their loyalty.”

Asked by a faculty member to give an example of a challenging moment, one which illustrated difficult choices in action, Mr Anderson continued with a challenge to the audience of business school students:

“What’s important to you? What’s really important to you? If you’re clear on what your values are, that should play a role in what companies you want to work at. You’ve got to start from there. Companies like Levi Strauss… we’ve been very in clear in what we stand for. I have no doubt that I would not be at this company today if it did not really align with my own values and what was important to me. If you get them, every day is not so much a test, just reinforcing what you believe in.

“[When recruiting] I really want to know, what’s important to you?My company might not be the place you want to work. We’re not going to be a company that does profit without principles; that’s not who we are. We have our key values. That’s what makes us who we are. I’m not saying every company should be like that, but after 150 years something works. And the commitment to that is non negotiable from me and my team, and the stakeholders and shareholders are aligned with that as well. From top to bottom.

Where do you want to work?
What’s important to you?
Do you have the courage to stay committed to that journey?

“I have talked people out of joining Levi Strauss. If you want to come here and be ruthless, slash and burn, and only drive profit to the bottom line, this isn’t the place for you to be. If you truly want to come in and align to the values and drive sustainable profitable growth, then this is an option for you. So we have our filters. But at the end of the day they’re not difficult, [the values], because they’re there, we’re disciplined and we obey them. When things got really tough we didn’t back off. We stayed true. But we sure were tested; we certainly were tested. That’s what leadership is really about. Now more so than ever.”

Competing in the world of fashion, where trends come and go, the one thing that remains constant at Levi’s is their values, and it seems to have kept them at the top of their game for over a century and a half. I’m prepared to bet they will be around to celebrate their 200th anniversary and beyond, still as the market leader.

You can watch the video here:

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Despite the central role that Stanford has played in building Silicon Valley, and alumni who have formed companies such as HP, Sun Microsystems, Yahoo!, Paypal and Google, I was surprised to learn that cumulative earnings from technology developed at the University are just $1.3 billion since 1970, when the technology licensing office was established. I say “just” because Stanford’s total annual budget is $3.7 billion. Donations alone last year were $640 million, ten times the earnings from licensing out inventions in the same period.

But when looking at the total earnings figure you have to be aware that the University does not “own” all inventions, only those in which staff or students have used University resources to produce the invention. (In these cases royalties are split equally three ways between inventor, department and school.)

Pareto in action

65% of licensing earnings came from just 3 of the 8000 inventions which have passed through the doors of the OTL:

Google’s improved hypertext searching: $337 million

DNA cloning: $255 million

Functional antibodies: $229 million

Sadly for the University they struggled to put a value on Larry and Sergey’s invention and opted for 2% of equity, and immediately cashed out post-IPO. For other more obviously monetisable inventions they tend to go for a annual maintainence fee and revenue share instead.

Other notable inventions which have generated decent revenues for Stanford included FM sound synthesis and digital subscriber line technology (DSL).

Highs and lows:

The schools of engineering, physics and medicine are the top contributors to Stanford’s licensed technology; the business and law schools are joint bottom. It seems there’s an opportunity for both schools to get more involved in the commercialisation of the inventions their colleagues are producing.

Warning: here is a business opportunity!

The OTL has a bank of 3000 inventions packaged and ready for you to use! They’ve even put them on their website that can be searched searched using their Techfinder tool.

There’s no geographic bias, whether you are in Cupertino or Canberra you can take a license, and there’s no preference to startups or multinational corporations. In fact, most technologies end up being licensed by small startups. While they don’t have a preference, they do have criteria, and want to do whatever is best for the technology or invention, making it a commercial success.

When licensing to startups the usual criteria applies:

Quality management team

The investment to commercialise the opportunity

Realistic business development plan (just a few pages!)

Passion and enthusiasm

Is the Stanford approach the right one?

Stanford’s approach is interesting and successful but is just one way of getting inventions out there. Other Universities take a much more selective approach and pick a few things they consider to be winners and spin out commercial enterprises themselves, (Stanford’s view: “research and education comes first”, and want to avoid any potential conflicts of interest), others choose to put everything out into the public domain. As for Katherine Ku’s own view of what is best, it all depends on the institution; there is no right or wrong approach. She hopes that maybe one day some of the inventions can be passed “down the line” to smaller universities or colleges who are more practically focused and can take something – often still obscure and needing more work done – and make progress on the road to commercialisation.